Perspective
Observation Care — High-Value Care or a Cost-Shifting Loophole?
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- A 2012 New York Times article told the story of Miriam Nyman, an 83-year-old Rhode Island woman who was hospitalized after a fall in 2009.1 Mrs. Nyman broke her neck and spent 4 nights in the hospital, so she was shocked to learn that the entire hospitalization was classified as an outpatient visit and billed as an observation stay. That meant that her subsequent stay in a skilled nursing facility was not covered by Medicare, and she was left with more than $35,000 in out-of-pocket expenses. Similar cases reported elsewhere in the United States highlight a critical and overlooked Medicare policy that requires reform — hospital payment for “observation care.”Originally developed for chest pain, protocolized observation care in dedicated units has been studied for conditions such as transient ischemic attack, asthma, and syncope. Clinicians evaluate patients in an observation unit according to standardized clinical pathways, typically for 24 hours or less, to determine the need for inpatient admission. Numerous studies show that this model can result in higher-value care — equal or better quality at a lower cost than inpatient settings — yet only about one third of U.S. hospitals have observation units.2Starting in November 1996, the Centers for Medicare and Medicaid Services (CMS) refined its payment codes for observation care, which it defines as a group of outpatient services administered under Medicare Part B that can be delivered in any setting — a physician's office, an emergency department, a regular inpatient ward, or an observation unit. Medicare policies have changed over time, but a specific care setting has never been a requirement for delivering observation services. Observation billing is the same whether it covers protocolized care in dedicated observation units, post–day-surgery recovery and infusion therapies, or care on a traditional hospital ward.Inpatient hospitalization, which in 2011 accounted for 24% of Medicare spending,3 has become a primary focus of cost control for CMS. Although readmission policies have gained attention, a policy action addressing the appropriateness of inpatient admissions was implemented several years ago with more financial impact. With few tools at its disposal for reducing admissions, CMS developed the Recovery Audit Contractor (RAC) program. Starting in 2005, the program empowered contractors to retrospectively audit hospital inpatient admissions for appropriateness and recover amounts that represented overbilling. The main information at the auditor's disposal is whether a patient qualified for inpatient or observation status; status is determined according to the criteria for admission appropriateness embedded in a screening tool such as Milliman or InterQual. Such audits have led to recoveries of large amounts of money from hospitals, with 90% of all hospitals currently reporting RAC activity and more than $2 billion recovered in 2012 alone.4In response, virtually all hospitals adopted systems to prospectively evaluate whether admissions meet those inpatient criteria and, if they don't, to assign patients to observation status. As a result, the annual number of observation hours for Medicare beneficiaries increased by nearly 70% from 2006 through 2010, from 23 million to 39 million.3 Because the risk of high out-of-pocket costs increases with an observation stay's duration, it's worrisome that the number of observation stays exceeding 72 hours — well beyond the 48-hour time frame envisioned by CMS for observation care — increased by 88% from 2007 through 2009.5Current CMS policy on observation care promotes cost shifting without rewarding higher value, since payment is time-based and does not reward the use of evidence-based clinical pathways or hospital units designed to provide efficient care for this group of patients. As a result, two distinct models of hospital care have emerged under the name of observation care: protocolized care in observation units and care in inpatient units billed as observation. When observation is used as a billing status in inpatient areas without changes in care delivery, it's largely a cost-shifting exercise — relieving the hospital of the risk of adverse action by the RAC but increasing the patient's financial burden. Though such payment policies might conceivably pressure hospitals to improve efficiency by redesigning inpatient care delivery by adopting observation-unit care protocols and staffing patterns, there is no evidence of such a change to date, and the number of observation stays longer than 48 hours is increasing.Observation billing exposes patients to increased cost sharing in several ways. First, since observation is considered an outpatient service, Medicare patients are responsible for Part B's 20% coinsurance for each individual charge incurred. Second, during observation visits, Medicare does not cover some services, such as medications patients receive from the hospital but that are considered eligible for self-administration (e.g., oral antihypertensive medications). Third, time spent in observation does not qualify toward the 3 days of hospitalization needed to trigger Medicare's skilled-nursing-facility benefit.Understandably, patients have been surprised when they receive an observation bill for what was perceived as an inpatient stay, particularly when out-of-pocket costs exceed the Medicare inpatient deductible. The patients most vulnerable to such expenses are those frequently hospitalized, because Medicare beneficiaries do not have to pay the Part A deductible again until 60 days after discharge from an inpatient hospitalization or any skilled-nursing-facility stay that follows. Although any single charge in an observation stay cannot exceed the inpatient deductible, there's no limit on the total patient expenses for such a stay.The table
Medicare Fees and Payments for a 3-Day Hospitalization for Syncope — Inpatient Stay versus Observation Stay. lists the payments for a hypothetical 3-day hospitalization for a patient with syncope that causes clinically significant functional problems. We compare hospitalization billed as an inpatient stay with the same hospitalization billed as an observation stay in terms of the patient's costs, the CMS bill, and provider revenues. Generally, out-of-pocket costs are highest when no observation unit was used. Care in a dedicated unit costs less because it follows time-dependent protocols that reduce unwarranted variation in diagnosis and treatment, resulting in faster completion of diagnostic services and an average length of stay of about 15 hours.
Outrage over the use of observation status has led to proposed reforms that threaten the use of all observation care. For example, a class-action lawsuit was filed against CMS in 2011, claiming that observation services violate Medicare legislation and the due-process clause of the Fifth Amendment, regardless of the setting. The recently released rule for 2014 Medicare payments includes a modified definition of inpatient status; to qualify as inpatients, patients would have to receive only medically necessary services ordered by a physician and their hospitalization would have to last through two midnights. This period would begin “when the beneficiary is moved from any outpatient area to a bed in the hospital in which the additional hospital services will be provided.” These changes attempt to cap observation stays at 2 days, addressing the issue of prolonged observation stays but failing to address the major concerns about cost shifting.To encourage high-value observation care and minimize cost shifting, we believe that CMS should reform observation-payment policies beyond the recent proposal. First, capping the total out-of-pocket expense at the inpatient-deductible amount would keep observation stays from costing patients more than inpatient admissions, which are generally more resource-intensive. Second, covering self-administered medications would allow clinicians to continue to safely administer them, since asking patients to bring in their home medications creates an unrealistic expectation and a safety risk. Third, counting time in observation toward the 3 days of hospitalization that qualify a patient for skilled-nursing-facility benefits would protect the most vulnerable patients. Several bills recently filed in Congress support this last change.Not all observation care is the same; payment reforms should protect patients from excessive out-of-pocket expenses and reward the efficient care delivered in observation units, which prevents prolonged hospitalizations. Public outcry about observation abuses has led to governmental attention, but reforms may threaten all observation care.Disclosure forms provided by the authors are available with the full text of this article at NEJM.org.SOURCE INFORMATION
From the Department of Emergency Medicine, Brigham and Women's Hospital, Boston.
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